GROSS PROFIT METHOD

1. Techniques for the measurement of the cost of inventories may be used for convenience if the results
approximate cost. The following are acceptable for year-end financial reporting purposes, except
a. Standard cost method
b. Retail method
c. Gross profit method
d. None of the above

2. The gross profit method is useful

a. When interim financial statements are prepared.
b. When inventory is destroyed by fire or flashfloods.
c. When testing the validity of an inventory cost determined under either periodic or perpetual system.
d. In all of these.

3. The gross profit method assumes

a. The beginning inventory plus purchases equal total goods to be accounted for.
b. Goods not sold must be on hand.
c. If sales, reduced to cost, are deducted from the sum of the opening inventory plus purchases, the
result is the ending inventory.
d. All of these.

4. On May 6, 2022 a flash flood caused damage to the merchandise stored in the warehouse of Zebu Co.
You were asked to submit an estimate of the merchandise destroyed in the warehouse. The following
data were established:
a. Net sales for 2021 were P800,000, matched against cost of P560,000.
b. Merchandise inventory, Jan. 1, 2022 was P200,000, 90% of which was in the warehouse and 10%
in downtown showrooms.
c. For Jan. 1, 2022 to date of flood, you ascertained invoice value of purchases (all stored in the
warehouse), P100,000; freight inward, P4,000; purchases returned, P6,000.
d. Cost of merchandise transferred from the warehouse to show-rooms was P8,000, and net sales
from Jan. 1 to May 6, 2022 (all warehouse stock) were P320,000.

Assuming gross profit rate in 2022 to be the same as in the previous year, the estimated merchandise
destroyed by the flood was
a. P80,000
b. P66,000
c. P50,000
d. P46,000
5. The Bochog Corporation was organized on Jan. 1, 2021. On Dec. 31, 2022, the corporation lost most
of its inventory in a warehouse fire just before the year end count of inventory was to take place. Data
from the records disclosed the following:

2021 2022
Goods available for sale 4,069,400 4,157,000
Sales 3,940,000 4,180,000
Sales returns and
allowances 80,000 100,000
Gross profit rate 21% ?

On Jan. 1, 2022, the Corporation’s pricing policy was changed so that the gross profit rate would be
three percentage points higher than the one earned in 2021.

Salvaged undamaged merchandise was marked to sell at P120,000 while damaged merchandise was
marked to sell at P80,000 had an estimated realizable value of P18,000.

How much is the inventory loss due to fire?

a. P918,200
b. P947,000
c. P856,200
d. P824,600

6. Lanaya Manufacturing began operations 5 years ago. On Aug. 13, 2022, a fire broke out in the
warehouse destroying all inventory and many accounting records relating to the inventory. The
information available is presented below. All sales and purchases are on account.

Jan. 1, Aug. 13,

2022 2022
Inventory P143,850
Accounts Receivable 130,590 P128,890
Accounts Payable 88,140 122,850
Collections on accounts rec.,
Jan. 1- Aug. 13 753,800
Payments to suppliers,
Jan. 1- Aug. 13 487,500
Goods out on consignment
at Aug. 13, at cost 52,900
 Summary on previous years’ sales:

2019 2020 2021

Sales P626,000 P705,000 P680,000
Gross Profit 187,800 183,300 231,200
GPR 30% 26% 34%

Determine the inventory loss suffered as a result of the fire.

a. P139,590
b. P102,560
c. P86,690
d. P86,310

7. The work-in-process inventory of Bee Company were completely destroyed by fire on June 1, 2022.
You were able to establish physical inventory figures as follows:

Jan. 1, 2022 June 1, 2022

Raw materials P 60,000 P120,000
Work-in-process 200,000 -
Finished goods 280,000 240,000

Sales from Jan. 1 to May 31, were P 546,750. Purchases of raw materials were P 200,000 and freight
on purchases, P30,000. Direct labor during the period was P160,000. It was agreed with insurance
adjusters that an average gross profit rate of 35% based on cost be used and that direct labor cost
was 160% of factory overhead. The work in process inventory destroyed by fire is:
a. P366,000
b. P314,612
c. P265,000
d. P185,000